Control Print – Company Analysis

Disclaimer: This report is prepared purely for academic purposes with data taken from secondary sources like company annual reports, company website, credit reports, research reports, screener.com etc.

This report intends to:

1. Analyse the various financial metrics of the company

2. Study the industry that the company operates in and analyse whether the company has any distinctive competitive advantages

3. Collate information from various Annual Reports, Investor Presentation Reports, Conference Call Transcripts and Credit Reports to understand the company strategy

This report is NOT:

1. An analyst report with future projections or target prices

2. A recommendation on the stock to “Buy” or “Not Buy” – since the company is listed

The contents of this document are personal opinions of the author based on the analysis done with the available information. Reader’s discretion is mandated when making any investment decision based on this information.

Introduction

Control Print operates in the niche coding and marking segment, an oligopolistic market, with four major players, three of which are MNCs. This makes Control Print the only “Make in India” manufacturer and the only integrated player with capability to manufacture both printers as well as consumables in India.

In this analysis, we shall look into the coding and marking industry the company operates in, the financial metrics of the past, the operational efficiency and the company strategy.

An Analysis of the Past

Sales and Operating Profit

Let’s explore the growth in Sales and how the company has fared in maintaining the operating profit for the past ten years.

Control Print has been able to increase its sales almost consistently from Rs 67 Crores in FY 2012 to Rs 204 Crores in FY 2021 at a CAGR of 13.2%. The operating profit has also increased from Rs 9Crores on FY 2012 to Rs 50 Crores in FY 2021. The operating profit margin has stayed healthy and increased from 13% in FY 2012 to 31% in FY 2018. However, after FY 2018, the operating profit had declined and stayed in the range of 23% to 24% in the financial years from 2019 to 2021.

Even though the company’s sales indicate a positive trend, it is important to ensure whether the growth is sustainable. For this purpose we need to examine the Control Print’s business and industry in depth.

Let us try to understand the business of Control Print and the industry it operates in.

The Company – A Brief

Control Print is a leading player in India in manufacturing Coding and Marking Machines and its corresponding Consumables.

Considering the urgent requirement in healthcare / medical Industry due to massive impact of COVID-19 Pandemic, the Company commenced to facilitate carrying out the new activity of manufacturing of Face Mask along with the present business activity of Coding and Marking.

The company operates in a four-player oligopolistic industry. The other three players are MNCs namely Videojet, Domino Printech and Markem-Imaje.

History of Control Print

• Control Print Limited (CPL) started its journey in 1991 by venturing into the inkjet printer market and was primarily a distributor of Videojet printers

• In 2008, CPL ended its association with Videojet and started indigenous manufacture of printers in India under its own brand name although in technical collaboration with various international agencies like KBA Metronic (Germany) and Macsa

• CPL commenced production at its Nalagarh plant in July 2007. It includes production of inkjet printers, large character printers, thermal transfer over printers and consumables

• FY09 and FY10 were years of struggle for CPL wherein it reported subdued profitability. EBITDA margins dropped to ~6%

• After attaining a sizeable printer base with assured consumables demand (high margin business), CPL finally turned around its operations in 2013. EBITDA margins improved to ~19%

(Source: ICICI Direct Research Report)

The Industry

The coding and marking industry primarily consists of printers (coders/markers) along with consumables that are required to print essential product details like manufacturing date, expiry date, batch number, maximum retail price, manufacturing location, etc. on any product manufactured.

The usage extends along sectors like personal care, food & beverages, pharmaceuticals, construction materials (steel, cement), extruded products (cable, wire, pipes), agro-chemicals, chemicals, etc. Demand factors that will drive the usage of printers and associated consumables are: legal requirements (providing product information to customers), inventory control, traceability (tracking products by date of manufacture, batch numbers), branding (printing of logos, customer perception) and counterfeit prevention.

Therefore, with growing consumer awareness, consumers shift towards branded products, higher disposable per capita income coupled with greater application of coder and markets, the domestic industry is on a strong footing with robust prospects, going forward.

Company Products and Operations

Control Print has two factories based at Nalagarh, Himachal Pradesh and Guwahati, Assam. The Nalagarh facility caters to design and engineering requirments of all of the company’s products, in addition to manufacturing all printers, printer assemblies and printer components. The Guwahati factory began operations in May 2015. This facility spreads across 65,000 sq ft of built up space and is an automated facility employing the latest high-precision technology.

(Source : https://www.controlprint.com/about/infrastructure/)

The Products

Control Print provides the following range of products:

(Source: Investor Presentation, Q4 2020-21)

The company caters to wide range of industries. The prominent ones as shown in the Investor Presentation of Q4 2020-21 were as:

(Source: Investor Presentation, Q4 2020-21)

The company has a sales and service team of 350plus engineers across its 11 branches, to provide services to its customers. The after-sales service is very critical in this business to ensure that the production lines of customers continue to function continuously thereby maintaining customer satisfaction. Post sale of printers there is a continuous demand for consumables over the life of the printer, which typically lasts for 5 to 7 years depending on the operating conditions.

Presently, Control Print has an installed base of 13,000 plus printers across industries, which enables the sale of consumables across the life cycle of the printer.

(Source : Earnings Conference Call, Q4 2020-21)

The split of revenues coming from printers, consumables and service as provided by the firm’s CFO are:

Based on the above, a rough revenue split of the company for the financial year 2020-21 would look as:

An idea about the size of the market was also given by Mr Shiva Kabra, Joint Managing Director, Control Print during the Earnings Conference Call, Q4 2020-21.

The total market size is around ~Rs1500 Crores. The organized sector, as per Mr Kabra, contributes to around ~Rs 1150 Crores. So from these figures Control Print currently takes around 18% market share of the organized segment. (Revenue of Control Print in FY 2020-21 was Rs 204 Crores)

Net profit

(Source of financials: screener.com)

Control Print has been able to grow its Net Profit from Rs 8 Crores in 2012 to Rs 29 Crores in 2021 at a CAGR of 15.5%. This has been an impressive growth of profits year on year. However, it can also be observed that the profits had grown from Rs 8 Crores in 2012 to Rs 26 Crores in 2016. In 2017, profits reduced to Rs 19 Crores before increasing to Rs 29 Crores in 2021.

The net profit margin increased from 12% in 2012 to 19% in 2016. The net profit margin then decreased to 13% in 2017. Though the net profit margin increased to 18% in 2018, it seems to have stabilised around 14% in the years 2020 and 2021.

The company’s ability to maintain a good operating profit shows its ability to pass on the increase in the cost of raw materials to its customers. The company has maintained a low debt, which futher helps to keep its net profit margins also healthy, as can be seen in the above graph.

Interest Coverage

The interest coverage ratio indicates whether company’s current earnings are sufficient to cover the interest commitments. The higher the ratio, greater is the ability of the firm to meet its debt obligations The ratio is calculated by dividing a company’s earnings before interest and taxes (EBIT) by the company’s interest expenses for the same period. A higher ratio means that the company would not be overburdened with debt issues during low business cycles or tough economic circumstances like the recent Covid-19 uncertainty.

With this understanding, let us check the debt and interest coverage of Control Print:

Throughout the years from 2012 to 2020, Control Print has been able to maintain a high interest coverage ratio, which indicates that, its debt burden was low compared to its earnings. This also means that the capacity expansions that had taken place could have been financed by internal accruals.

As seen from the liability side of balance sheet, over the years, the long term borrowings has been always low for the company. The years from 2018 till 2021 shows NIL long term borrowings. The low debt levels shall help the company to be resilient to economic shocks.

Operational Performance

Let us look at the split of expenses in the company.

Raw material cost is the major component of the expenses. As a percentage of sales, this is around 40% and more or less consistent throughout the years. This again reflects the fact that Control Print is able to pass the rise in cost of raw materials on to its customers. The industry the company is operating in could be a factor for this, as price wars or competitive rivalry seems to be relatively lesser when compared to other B2B industries due to the presence of only four players, and there seems to exist customer stickiness due to which Control Print is able to maintain its margins.

Employee cost has risen over the years. From 13% of sales in 2011, it is 21% of sales in 2020. Power and fuel cost seems to be negligible for Control Print given the figures. Control Print has a significant Selling and Admin Cost which is around 15% of Sales. This could be due to the company’s strategy of having Regional Offices / Branches throughout the country so as to be close to its customers.

Next, we can look at how efficiently the company is putting its assets to use and its inventory management.

Net Fixed Asset Turnover ratio compares sales from income statement and net fixed assets from balance sheet to measure the company’s ability to generate sales from its fixed asset investments comprising property, plant and equipment.

Inventory turnover indicates the rate at which a company sells and replaces its stock of goods during a particular period. Higher the inventory turn over the better, as it means there are more inventory turns happening in that period.

Inventory turnover has been in the range of 2 to 3 throughout the years from 2012 to 2021. The inventory turnover is also showing an increasing trend from 2.0 in 2014 to 3.0 in 2021. This could possibly be due to better management of operating costs and also as sales are increasing along with inventory turnover, this could also mean higher demand for the products of the company.

Net Fixed Asset Turnover (NFAT) however was 3.8 in 2012 and it had increased to 5.3 in 2015; thereafter it reduced to 1.9 in 2021. We need to analyse further to find the reasons why. The Capex done by the company possibly could not be converted effectively into sales from 2016 to 2021.

Cash Flows

Control Print in the last nine years, has generated a cumulative net profit of Rs 207 Cr. The cumulative Cash from Operating Activity (CFO) over the same period has been Rs 160 Cr. This means the company has not been able to convert all its profits into cash flow from operations, which would require further analysis. We have noticed that the business of Control Print is working capital intensive in nature. The held up of inventory in certain years as seen in the below image, could possibly be a reason for lower cashflow from operations.

Also, we find that the average Capex of the company over the years have been around Rs 18crores annually, but in the year 2017 the company had a relatively huge capex of 57 Crores. This had also resulted in negative Free Cash Flow of 39Crores during the same year. However, in the later years the company was able to convert its net profits into cash flow from operations. Looking at years from 2018 to 2021, the cumulative net profit was Rs 116 Cr and the cumulative CFO was Rs 111 Cr; meaning from 2018 onwards Control Print was able to convert almost all its net profits to cash flow from operations. This parameter however needs to be tracked closely going forward.

To increase its sales from Rs 80 Cr in 2013 to Rs 204 Cr in 2021, Control Print had to invest a cumulative Capex of Rs 165 Crore. The cumulative CFO over the same period was Rs 160 Crore, meaning that the company was not able to generate any Free Cash Flows and had a negative cumulative FCF of Rs 5 Crores. The company had taken borrowings for this Capex and also funded the same through issuing warrants and from internal accurals. A cumulative dividend of Rs 75Cr was also paid during the period 2013 to 2021.

In the year 2017, the company made a relatively high Capex of Rs 57Cr. The company also had a negative FCF in the years from 2014 to 2018. We had previously seen in our NFAT ratio calculation that NFAT was lower in years from 2017 to 2021. It could mean that these investments done in 2017 are yet to generate the desired sales. We also need to further look into the Capex done during these periods.

The Capex in PPE can be seen in the respective Annual Reports:

The company in order to keep up its pace in the market, needs to constantly upgrade its products and technology. It also needs to ramp up its production in order to increase its sales. For this, the company had set up a manufacturing unit at Guwahati which started operations in May 2015.

The company has often shown a tendency to bring down its debts using its internal accruals. An example of this can be seen from the following images of Annual Reports of FY 2014-15 and FY 2015-16.

From the above two images we can see that the company had a long term borrowing of Rs 3,02,968 in March 2014. This was bought down to Rs 24,806 in March 2015 and then reduced to zero by March 2016. And as we discussed above, from 2018 onwards the company had not taken any long term borrowings. This conservative approach in debt management augurs well for the company and would definitely give it an edge in tough economic situations/times, like the present Covid crisis we are going through.

The company has focused on improving/increasing its fixed asset base in a phased manner. This can be observed in the images of Fixed Assets taken from Annual Reports of FY 2015-16 and FY 2016-17 given below.

The above three images indicates that a considerable capital allocation was done during FY 2015-16 to enhance the fixed asset base of the company. An investment of Rs 744 lakhs was done to improve/increase the factory premises from Rs 609 lakhs to Rs 1353 lakhs. The Net Block of factory premises increased from Rs 389 lakhs to Rs 1095 lakhs. Also, plant and machinery were upgraded/increased from Rs 561 lakhs to Rs 1199 lakhs.

From the image of Annual Report 2016-17 provided above, we can observe that these additions were possibly undertaken to enhance the capability of Guwahati plant which was initially started to produce consumables. But as can been seen from the image of Earnings Conference Call of 2021, they have also started manufacturing of some printers from the same location.

Return Ratios

Though many return ratios can be analysed, we shall focus on Return on Capital Employed (ROCE) and Return on Equity (ROE). ROCE can help to understand how well a company is generating profits from its capital as it is put to use. ROCE = EBIT/Capital Employed.

ROE is considered a measure of the profitability of a company with respect to stockholders’ equity. ROE = Net Income/Shareholders’ Equity.

The Return on Equity was 19% in 2013 which increased to 24% in 2016. Thereafter RoE declined to 13% in 2021. This prompts us to check the PAT growth trend:

The PAT growth in recent years seems to have slowed down. Also last three years had shown a PAT decline. The PAT in 2018 was Rs 31 Crores which declined to Rs 29 Crores in 2021. This could be a reason on RoE falling. The DuPont Analysis which we shall do later would give a clearer picture on why the RoE is declining.

ROCE was 22% in 2013. The RoCE increased to 30% in 2016; however later on it exhibited a declining trend and went down to 17% by 2021. We had also seen that the company has been doing continuous expansions and the falling NFAT. The new assets are yet to produce the desired levels of output, which could also be a reason for the low RoCE in 2021.

DuPont Analysis

DuPont analysis helps us to look further into detail of Return on equity. There are three major financial metrics that drive return on equity (ROE): operating efficiency, asset use efficiency and financial leverage.

This can be explained as:

As can be seen from DuPont Analysis table, Net Profit Margin was maintained at healthy levels, (always above 13% in the last ten years), by Control Print. From 15% in 2013, the company managed to raise it to 19% in 2016 after which the margins seems to have stabilised at around 14% in the years 2020 and 2021.

Hence, we are able to see that RoE has reduced due to decline in asset turnover and equity multiplier. The capex done and inability to bring about proportionate realizations has caused the erosion in asset turnover from 0.83 in 2013 to 0.70 in 2021.

The equity multiplier had reduced from 1.36 in 2013 to 1.25 in 2021. The company to raise funds, had issued warrants to promoter and promoter group, the details being shown in the image below from Annual Report 2013-14 and 2015-16.

This increase in share capital without proportionate increase in assets, could be the reason for bringing down the equity multiplier, which was also a cause for the declining RoE.

The Management

The company is headed at the helm by Mr. Basant Kabra, Managing Director and Mr. Shiva Kabra, Joint Managing Director.

The promoters hold ~53% shares of the company. This is a reasonably high holding for taking on important decisions pertaining to the company and also assures of “skin in the game” for business growth.

Mr. Basant Kabra and Mr Shiva Kabra had also purchased shares from the open market during the Financial Year 2019-20 as can be seen in the screen shot below. Normally, promoters buying shares from the open market and increasing their shareholding shows their confidence in the future prospects of both the company and the industry.

The remuneration taken by both Mr Basant Kabra and Mr Shiva Kabra is Rs 178 Lakhs each. This is around ~7% of the Net Profit of the company for the FY 2019-20. This seems to be on slightly higher side. However, we cannot make a comparison within the industry as the other players are private.

Both Mr. Basant Kabra and Mr Shiva Kabra are qualified and highly experienced in their domains. Also, Mr. Shiva Kabra, who is actively into taking strategic decisions for the company, is also the son of Mr Basant Kabra. Hence, it can be assumed that the business has a successful business transition or a succession plan in place. This is quite important for small cap companies like Control Print.

The Business as seen by the Management

The Earnings Conference Call of Q4 2020-21 and some Annual Reports gives us some pictures on the company strategy and how the management views the business. Some of the points were already discussed above. Few other points observed are given below:

Sales and Service Team

The company gives paramount importance to being close to the customer in providing the best services.

This strategy helps in retaining the customers by keeping them satisfied on their service requirement fronts and also helps in generating consumable sales, which is a high margin element for the company.

Installed Base

The company has an installed base of ~13,000 printers, across various industries as of date.

Sectors

The company is the leader in MDF sector and also dominates pipe industry. Majority of revenue comes from its flagship division of Continuous Ink Jet (CIJ). The company is trying to penetrate into new segments and also trying to improve market share in its strong segments by winning competitor accounts.

Business Divisions

The management basically sees the business as two divisions or parts:

1. Industrial

2. Packaging

As per Mr Shiva Kabra, in the conference call Q4 2020-21, in India 60 to 70% of the market is packaging which would comprise dairy, bakery, packaged foods, beverages, pharma etc; and 30 to 40% is industrial which comprise cement, steel, wire pipes, wood, auto components, chemicals etc. Control Print as a company has a stronger base in industrial sector and has been traditionally weak in the packaging sector. The company has been putting a strategy to focus aggressively on the packaging sector too, which would result in incremental sales.

Future Sales

The current annual sales of the company is around Rs 200 Crores. The company hopes to take the sales to around Rs 350 Crores in the next two to three years.

Other notable points of the company

The credit report by CRISIL dated July 21, 2020 mentions the following details (in italics), worth noting about Control Print:

“The ratings continue to reflect the extensive experience of the promoter in the industrial printer industry, and CPL’s established market position, healthy profitability and adequate financial risk profile. These strengths are partially offset by large working capital requirement and modest scale of operations.”

CRISIL acknowledges the track record of the company and the experience of its promoters. It also mentions positively about its healthy profitability (which have seen in the Net Profit Margin analysis), the adequate financial risk profile (which we have seen in the NIL long term borrowings in recent years) and its established market position (as it is part of an oligopoly of four players).

“The lockdown and other measures taken by the central and state governments towards containment of the Covid-19 pandemic are expected to have only a moderate impact on the business risk profile of CPL. Its operations were disrupted in the months of March and April 2020, because of the lockdown. However, after commencing its operations in May 2020, the scale of operations have improved significantly. Scale is currently around 70% of the pre-pandemic level, and is likely to further improve over the coming quarters, sustaining the overall credit profile of CPL.”

As seen in our analysis, the low or NIL debt approach by the company has favoured the company in tough economic times like Covid, to sail smoothly amidst the lockdown and also rebound quickly once the restrictions were lifted. This was acknowledged by CRISIL in its report.

“The group’s brand, Control Print, has a strong recall in the domestic industrial printer market as the promoter has 25 years’ experience in the segment. It also has established relationships with reputed clientele such as Hindustan Unilever Ltd, Britannia Industries Ltd, Tata Steel Ltd, and ACC Ltd.”

The report mentions Control Print’s strong relationship with reputed clients. As we have seen, the company also has a strategy of having a network of branches to give best service to its clients and to be close to them.

“While operating margin is likely to be under pressure in fiscal 2021, because of subdued revenue growth, it is likely to be partially compensated by higher revenue contribution from the consumables segment, which has better margin. The margin is expected to be 23-25% over the medium term, backed by growth in revenue expected from fiscal 2022, leading to economies of scale and greater contribution from high-margin consumables. CPL’s operating margin is expected to remain healthy over the medium term.”

CRISIL mentions about a possible growth in expected revenue from fiscal 2022. In our analysis also, we have seen that the Capex done is yet to reach its full potential. Also, we have seen consumables contribute more than 50% of the company’s current revenues. So the increase in consumable sales would help in augmenting the company’s margins.

“Operations are working capital intensive, funded by internal accrual, resulting in unutilised bank limit of around Rs 47 crore, over the 12 months through March 2019. Liquid assets are estimated at around Rs 14 crore as of March 2020, providing additional liquidity cushion.”

CRISL also notes the working capital intensiveness of the business and also mentions about the same being funded by internal accurals, as observed in our analysis. CRISL is also comfortable with the liquidity cushion available with the company.

Probable challenges for Control Print

1. The operations of Control Print are working capital intensive. Managing inventory and high inventory days could pose challenges to the company.

2. Competition with MNCs. The organised market, though comprises of only four large players is dominated by MNCs. It would be difficult for Control Print to penetrate into segments that are dominated by these MNCs.

3. “Being global players, MNCs have better reputation and are able to earn superior margin compared to CPL.” (Source : CRISIL Report, July 2020). CRISIL also hints that given the better brand image/recall MNCs could be enjoying a better margin than Control Print.

4. The installed base of few competitors are already bigger than that of Control Print’s. In certain products and applications the competition is well entrenched – hence increasing the market share could be both difficult and lengthy in nature.

5. Technology Upgrades – The business would require consistent upgradation in technology to improve the existing products or bring into market the latest developments in the field, else there is always a threat of your customers moving to your competition, if they succeed in convincing Control Print’s customers’ that they have superior products.

Conclusion

Control Print is a small cap company with a market capitalization below Rs 600 Crores as of now. The company operates in the niche coding and marking segment, an oligopolistic market, with four major players, three of which are MNCs.

The company has maintained an operating profit margin above 20% and net profit margin above 12% throughout the last ten years. About ~50% of its sales comes from consumables, which has a relatively better margin. This along with good relation with clients has helped the company in maintaining good operating and net profit margins. Also, the broad base and scope of coding and marking industry with only few players chasing the vast opportunity and resources, helps the existing players in garnering adequate business.

The company has been successful in keeping its debt either low or nil. For the last three years, there has been no long term borrowings. Almost all the working capital management and expansions has been done through funds from internal accruals and raising minimal debt. This has helped in keeping the financial/liquidity risk always under check for the company.

Free Cash Flows was a concern for the company as most expansions were done through internal accruals and also with regular dividends being paid, negative FCF was visible from 2014 to 2018. Thereafter, not much of significant Capex was done and from 2019 to 2021 company was seen generating healthy Free Cash Flows.

Competing with MNCs, the company has to consistently upgrade its technology and bring about the best products to retain its established clients. The same reason is a challenge for the company to increase its market share, as certain products and applications are well entrenched by the competition.

The management however is confident of the opportunities in the industry and has also given an outlook, in its Earnings Conference Call of Q4 2020-21, wherein it looks at taking its sales from the current 200 crores to 350 crores in the next two to three years. Let us look forward to see how the future unfolds for Control Print.

About the Author

Dileepraj R is the CEO and Managing Partner of MintMelon Business Consulting LLP.